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Okea, the first of the latest generation of North Sea producers that have attracted significant private equity (PE) cash to go public, had a low-key start in June to its life as a public-traded firm.

The company cited "severe volatility and a strong downward spike in the oil price" during the book-building period and "substantial indications of interest below the indicative price range" for a delay in its initial timeframe, revised pricing and a lower volume of shares sold than previously planned.

Okea finally debuted on 18 June, having sold around 30pc of its shares in its initial public offering (IPO) at a price of NOK21 ($2.44). The initial plan had been to sell just over 50pc of the firm at a target price range of NOK25-33/share. The IPO thus raised NOK315mn, compared to NOK650-858mn based on the volumes and price range previously targeted.

Despite the reduction in price and shares sold, the firm says it received "wide endorsement for Okea's strategy and solid position" on the Norwegian continental shelf (NCS). But its bumpy route to market may raise concerns over investor appetite for other planned listings for North Sea-focused producers, given a potentially busy IPO pipeline.

Wintershall Dea, the German producer formed by May's merger of the assets of chemicals heavyweight BASF and Russian investment vehicle Letter One, is targeting an IPO in the second half of 2020, while Sam Laidlow, executive chairman of PE-backed Neptune Energy, confirmed to Petroleum Economist in December that the public markets are the preferred exit strategy for his investors, while stressing that there was no rush to list. As many as 10 other producers on either the NCS, UK continental shelf (UKCS) or both could also be contenders to IPO.

Midstream exit

And other players could also be looking to exit, such midstream gas firms Centrica and Bayerngas, who combined their upstream holdings onto Spirit Energy and may follow a familiar trend of European utilities exiting the upstream business. The public markets are an important exit route given a potential dearth of trade buyers.

Israel's Delek, which bought UK independent Ithaca in February 2017 and announced in May it was expanding by buying a large chunk of Chevron's North Sea business, is a rare example of an international player entering the North Sea. As recently as early July, Mathios Rigas, CEO of Greek E&P firm Energean, told Petroleum Economist that, having bought the upstream assets of another exiting European utility, Italy's Edison, the firm would "find another home" for Edison's "non-core" North Sea assets.

“Severe volatility and a strong downward spike in the oil price” – Okea

Locating that buyer may not be easy. ExxonMobil has joined the ranks of would-be North Sea sellers as it looks to shift its non-operated NCS portfolio, having sold its operated assets to PE-backed Point Resources, now part of the Var Energi joint venture with Italy's Eni, in 2017. But analysts are struggling to come up with credible buyers.

Part of the potential problem is the size of the portfolio. Consultancies Wood Mackenzie and Rystad both see it as potentially the largest NCS deal outside of transactions involving the then Statoil, with the latter valuing the assets at over $3bn, so it is a significant mouthful for any buyer to swallow whole.

Bad timing

For example, Wintershall Dea could be a potential buyer, says Karl Fredrik Schjott-Pedersen, an analyst at Norwegian financial services firm ABG Sundal Collier, but it would involve the firm doubling the size of its NCS business. Given that it is focused on both post-merger integration and an IPO, it seems unlikely that it would want to add a significant acquisition to its to-do list at this point.

Timing may also be a problem for other potential suitors, for example North Sea independent Faroe Petroleum is going through a takeover by Norway's DNO. And, while some analysts, including Wood Mackenzie, see PE-backed new entrants as likely candidates, one of its larger fish, Chrysaor, currently has the acquisition of ConocoPhillips' UKCS assets on its plate at present.

Of the other bigger PE players, the more oil-heavy nature of ExxonMobil's assets does not fit particularly obviously with Neptune's gas focus. And while Var could be a buyer, the fact that, as Point, it snapped up only ExxonMobil's operated assets in 2017 casts some doubt on its appetite for its non-operated stake.

The non-operated nature of the stakes makes neither of the NCS' largest independents, Aker BP and Lundin, obvious candidates to make an offer, says Schjott-Pedersen, as it would involve both moving significantly away from current business models. The former in particular sets a great deal of store on operating its assets, and, as minority partners, neither could add significant value through improved technology.

Equinor knows the assets well, as it is the operator of most of them, and has cash to burn, putting it in a good position to buy, especially if limited appetite from elsewhere lowers the price, says Schjott-Pedersen. But others are unconvinced that the portfolio would add any value to Equinor, at least in part because it would not improve its tax position. The firm has done little of these sorts of NCS acquisitions in recent years, adding to sentiment that it may not be in the running.

Corporate upswing

There are other, smaller PE-backed NCS players, such as Wellesley Petroleum, Mime Petroleum and Pandion Energy. While the ExxonMobil assets look very large compared to their existing assets, all of the new PE-capitalised firms were small until acquisitions made them bigger. Mime, backed by PE firms Blackstone and Blue Water Energy, is seen as having the most firepower to do a transformational deal.

Despite potential challenges, NCS corporate activity continues. In early July, Equinor pared its stake in Lundin from 20.9pc to just 4.9pc, exchanging the other 16pc for a 2.6pc stake in the giant Johan Sverdrup field and $650mn in cash. Equinor's stake in Johan Sverdrup increases from 40pc to 42.6pc, while Lundin's falls to 20pc.

The deal ends rumours that Aker BP might buy Equinor's stake in Lundin in exchange for a realignment of the North of Alvheim Krafla Askja (Noaka) development, which has stalled due to a lack of agreement between the two firms on unitisation.

Analysts had doubted whether the transaction, first reported in reputable Norwegian business newspaper DN, was a genuine contender, not least because of rivalry between tycoons the Lundin family and Aker BP's largest shareholder Kjell Inge Rokke. The value of a minority stake in Lundin, and exposure to its corporate costs, also looked like less than optimal use of Aker BP's cash compared to other opportunities that might fit better with its business model. On the other hand, the start-up of Johan Sverdrup later this year will give Lundin attractive cash flows.

A corporate solution to Noaka will likely still need to be found, as Aker BP and Equinor have largely negotiated each other to a standstill and the Norwegian government appears unwilling to step in to act as an arbiter.

One surprise around Equinor's decision to cut its Lundin stake to under 5pc is that many had seen its 20pc holding as a proxy ‘golden share' for the Norwegian state—67pc owner of Equinor—in controlling Lundin's fate should it become an M&A target, as well as Equinor having a say in any future owner of its largest Johan Sverdrup partner.

But, given the current climate where it is hard to rustle up a long list of credible buyers for NCS stakes on the market, Equinor's willingness to sell down its stake may reflect a sentiment that the odds of Lundin attracting a bid from a would-be buyer not to the Norwegian establishment's taste are fairly slim.